The common law has long been hypothesized to promote economic efficiency. Judges will implicitly (or for some, explicitly) attempt to craft legal rules that will enhance social welfare. But a judge’s ability to do so depends on their knowledge of the underlying factual circumstances and on their incentives to modify legal rules to accommodate changing circumstances. As such, the structure of the judicial system plays a large role in determining whether legal rules will be modified to promote social welfare.
Professor Gillian K. Hadfield tackled this issue in her paper, The Dynamic Quality of Law: The Role of Judicial Incentives and Legal Human Capital in the Adaptation of Law, which she presented at the Law and Economics Workshop. She used a mathematical model to explore how certain aspects of a judicial system—the incentives for lawyers to make novel arguments, and the incentives for judges to modify legal rules—will affect the evolution of legal rules in the face of changing economic circumstances. Her model can then be used as a basis for comparing different judicial systems and their efficacy in producing socially desirable legal rules.
Gillian starts with the assumption that judges can only modify legal rules to deal with new circumstances if they are apprised of the new circumstances. The lawyers arguing before judges must make novel legal arguments in order to persuade the judge to modify the legal rule. But lawyers will only do so if the private benefits of the rule change outweigh the costs. This suggests that court costs should be kept as low as possible to encourage novel argument. Unfortunately, this has a significant downside of encouraging spurious arguments, and even worse, encouraging socially undesirable legal arguments. Lawyers on one side may advance socially undesirable legal arguments if the private benefits outweigh their costs. This increases the chance that the judge will adopt a “bad” legal rule. Knowing this, judges will be more hesitant to change legal rules out of fear they will get it wrong. This suggests that there must be a middle ground for a legal system’s costs in which bad legal arguments are discouraged, but in which it is still feasible for lawyers to advance good legal arguments.
After the novel legal argument is made to a judge, the judge must still decide whether to modify the legal rule. The judge knows that the lawyers are advocates representing their own private interests and is therefore wary of changing the rule. After all, he may get it wrong. The judge faces conflicting incentives of following previous rules or risking a change that may turn out to be lauded by the legal community. The choice a judge makes is influenced by the particular legal system and the type of behavior that is rewarded. Does the system reward consistent rule-following judges or the visionary rule-modifying judges?
Another important variable that affects whether a legal rule will be modified—aside from the incentives facing lawyers and judges—is the stock of “legal human capital.” The judge’s decision to adopt a new legal rule is strongly influenced by how certain the judge is that he is adopting a socially desirable legal rule. This hinges on his familiarity with the underlying circumstances and how the law interacts with those circumstances. A judge’s familiarity with the issues increases as similar cases are brought before him and as more opinions on the subject are issued by other judges. The increasing stock of legal human capital decreases a judge’s perceived chance of making an error and therefore increases the chance that the judge will modify the legal rule. This highlights another important aspect of judicial systems: Does a judge operate in a vacuum with no published decisions and accompanying reasons, or is there a large source of judicial opinions to rely on?
While Hadfield’s model does not intend to provide answers, it does attempt to provide a starting point to compare different civil and common law systems by highlight several key factors for future research. The comparisons it suggests are distinct from prior works in that they focus on a judicial system’s ability to adapt to changing circumstances.